Lender Processing Services Earnings Call Nuggets: Origination Services and Larger Levels of Share Repurchases

Lender Processing Services, Inc. (NYSE:LPS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Origination Services

Darrin Peller – Barclays Capital: The first question, Origination Services again was very strong even sequentially. When reviewing the background and history on Origination Services LPS would typically outperform the market. And then over the past year as you discussed it was a bit slower than the market, probably because of pullbacks from some appraisal activities. When we look ahead, I guess, number one, can you give us a little bit more directional color on what assumptions you are thinking of in terms of originations? I know you said, you think it will be better than some of the forecast, but down on refis at least. Is that materially better than MBA, because MBA is only I think around $800 million on refis down would be on a lot from this year we’re coming into our Barclays estimate somewhere in the 1.2 range. So, maybe how closer are you to each of those numbers? And then on top of that would you expect origination revenue to outpace the market again the way you used to or are there still appraisal or other activities that would prevent that from happening?

Thomas L. Schilling – EVP and CFO: Darrin, I think, as Hugh said, we’re more bullish, I think that would probably put us closer to the Barclays forecast than with the MBA forecast. Again I think it’s going to be probably be down, but it’s still going to be at I think a very elevated level as there is a lot of loans $9 million loans that have refi characteristics. In terms of the performance versus the metrics I can’t say within our settlement – within the (Thailand) close element we have continued to outperform the market on that by a pretty good ratio. It is the appraisal given that appraisals are only being down on probably about 60% to 70% of the refi activity that’s taking place that will continue to lag now because HARP had a fairly – about the same impact in 2012 as it will in 2013. I don’t think it will be as pronounced in 2013, but we will continue to see appraisal revenue lag the market metrics.

Hugh R. Harris – President and CEO: I’d just add to that, Darrin, the meetings we’re having with our customers. They are continuing to tell us they are thinking around refis will outpace what the MBA has put out as well. They are seeing increased volume I think in all of the (stuff).

Darrin Peller – Barclays Capital: I just want to follow-up on the discussion around capital. I appreciate the $100 million buyback announce, but I’m assuming that at least it was somewhat related to – a little more clarity on the legal front, given all the AG settlements. Help us understand, it sounded Tom like you were sort of addressing the buyback as something you’re getting ready for, but not ready to necessarily use just yet? Am I right in that assumption. The $100 million is a nice number, but obviously, you generate, well or $300 free cash flow. So, are you saying basically that you’re wanting to see what happens more on the front of some of the legal issues, payout the legal amount that you have to payout now and then you’ll maybe consider using the buyback more then, or are you saying that you’d add to it then? Can you just give us maybe a little more color then?

Thomas L. Schilling – EVP and CFO: Yeah, I think the $100 million that was authorized in the announcement today, we will, as I mentioned first, we obviously are going to have lot of liquidity, we had a lot of cash on the balance sheet as we exited the fourth quarter, but we are obviously in the process as we speak of paying out, a lot of cash settlements to the Stage AG. We’re hopeful that we’ll be settling some other issues in the near future. So, my comments were just mean to clarify that we’re going to continue to make sure that we get those cash responsibilities behind us, before you’ll probably see us in the market in a big way buying shares.

Hugh R. Harris – President and CEO: I one of the things that I want to make sure is as we continue to grow our origination technology in our investments in that space, we may find opportunities for acquisitions and we want to be able to focus on that as well. It’s how we use the cash.

Darrin Peller – Barclays Capital: Last question and then I’ll go back to the queue. On the consent order, obviously we’ve resolved quite a few of the issues, where do we stand there? I mean, is it something Hugh, that you can see happening in the year, or something that should be earlier than that. Just give us a bit of sense of timing in terms of your expectations?

Hugh R. Harris – President and CEO: Todd Johnson and I meet with our groups every week and there is ongoing discussion with them on a daily basis. We are pleased at this point as to where we are in the process around the consent order. I told everyone last year it is a process that we have to get through. We think it is in our best interest at this point to finalize the document execution review and get this thing finished up. Our anticipation is or at least our hope is that we would be finished by the end of year, but that probably is really going to be depending on the fed and others as to the timing. But I am very comfortable where we are in this process.

Larger Levels of Share Repurchases

Carter Malloy – Stephens: On the last question actually around the consent order and timing. Given that it could be a long time but you are as comfortable as you say you are. Does the consent order still or settlement of that still absolutely preclude a larger buyback or can we see you guys as we move forward through the year commit to a larger level of share repurchase?

Hugh R. Harris – President and CEO: As far as the consent order is concerned everything around that is built into our current legal reserve and our expectations around that. So, depending on the timing of when it gets done I think we are adequately covered in that regard. You can speak, Tom.

Thomas L. Schilling – EVP and CFO: As I alluded to the Board we will continue to address whether or not we need to increase the share buyback later in the year and beyond, but we’ve generally, I think as a pattern and historically approved share repurchases in increments of $100 million, and I think that’s what we kept consistent with our past practice.

Carter Malloy – Stephens: In terms of the outlook for the rest of the year and even going into 2014, should we have the transactional type businesses decelerating in terms of their growth rates and maybe if you can’t give an overall, we think we’ll shrink the top on mid-single digits type of commentary maybe something along the lines of – we think we can keep free cash above $300 million a year. Just any guidance you can give us around us better building at DCF to understand the out years of the business would help a lot?

Thomas L. Schilling – EVP and CFO: In terms of cash flow, we don’t want to give too much guidance as you say, the reason we’re giving quarterly guidance is because it is very difficult to predict the volumes in this business, but right now our projections would put us at roughly that $300 million of cash flow again for 2013, but that’s contingent on as we said a fairly – we’re going to consider a strong refi market probably down slightly over 2012 levels, but still very strong historically speaking, and then continued probably choppiness, so to speak in the Default Services space, but again we’re focused on driving margins in those businesses, so we’ll be very diligent managing profitability regardless of what the volumes the industry throws at us.

Carter Malloy – Stephens: Maybe then on the margin side since it’s probably more likely than not that the industry gives some topline pressure this year and you guys have a little more control over the margins. Is that something where we should expect you to sustain margins or actually improve them this year?

Thomas L. Schilling – EVP and CFO: It all kind of depends on what the quarterly fluctuations on volume are. I would just stick to what we’ve been saying which is that we’re committed to keeping those businesses at a minimum of 20% EBITDA margin over the long term, and I think we’re really focused as we’ve said in the TD&A market in continuing to grow that, where we’re getting much more of the recurring revenue and the recurring EBITDA attributes which we find attractive.

Hugh R. Harris – President and CEO: I will just say to you as well. We’ve been meeting with a third party mortgage expert over the last several months doing some work together and as late as last week, we ask them about their thoughts around forecasting quarter to quarter versus for the whole year, and just to echo what you’re saying it is difficult to really predict where the refis are going as well as the default because, we’re all hopeful that with the settlement with the banks around their consent order that things will pick up, but I don’t think any of us can respond to that yet, until we see a little more time go on. The same with refis, if rates stay where they are or tick down a little bit, the refi volume will pick up. If rates go up, it is a bit more challenging. So, we appreciate your concern and how you’re trying to model, but it’s just still a difficult thing for us to provide at this point. One thing I will say, I is I’m very confident that we’ll get our share of the business in both categories regardless of where it goes.